Advance Accounting LTCC Manual Millan PDF

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Advance Accounting LTCC Manual Millan
Advance Accounting LTCC Manual Millan
Advance Accounting LTCC Manual Millan
Advance Accounting LTCC Manual Millan
Advance Accounting LTCC Manual Millan
Advance Accounting LTCC Manual Millan...

Description

Page |1

Chapter 7 Construction Contracts PROBLEM 1: TRUE OR FALSE 1. FALSE – Step 2 is the identification of the performance obligations in the contract 2. TRUE 3. FALSE – over time 4. TRUE 5. FALSE 6. TRUE ➢ 4M costs incurred ÷ 8M estimated total contract costs = 50% ➢ 10M contract price – 8M estimated total contract costs = 2M expected total gross profit x 50% completion = 1M gross profit 7. 8. 9. 10.

FALSE FALSE TRUE FALSE

PROBLEM 2: MULTIPLE CHOICE – THEORY 1. D – choice (d) is incorrect. Total contract costs may need to be estimated only if the entity chooses to use the ‘cost-to-cost’ method to measure its progress on a contract. This may not be necessary if the entity uses other methods, for example, an output method. 2. 3. 4. 5. 6. 7. 8. 9. 10.

D A B C D B A C C

Page |2

PROBLEM 3: EXERCISES 1. Solutions: Requirement (a): ➢ Gross profits Total contract price (a) Costs incurred to date (1) Estimated costs to complete (b) Estimated total contract costs Expected gross profit Multiply by: % completion (a) ÷ (b) Gross profit earned to date Less: Gross profit in prior yrs. Gross profit for the year

(1)

20x1 20,000,000 8,160,000 8,840,000 17,000,000 3,000,000 48% 1,440,000 1,440,000

20x2 20,000,000 15,480,000 1,720,000 17,200,000 2,800,000 90% 2,520,000 (1,440,000) 1,080,000

20x3 20,000,000 17,400,000 17,400,000 2,600,000 100% 2,600,000 (2,520,000) 80,000

20x1: 8,160,000 20x2: (8,160,000 + 7,320,000) = 15,480,000 20x3: (8,160,000 + 7,320,000 + 1,920,000) = 17,400,000

➢ Revenues Total contract price Multiply by: % of completion Revenue to date Less: Revenue recognized in prior yrs. Revenue for the year Cost of construction Gross profit for the year

20x1 20,000,000 48% 9,600,000 9,600,000 (8,160,000) 1,440,000

20x2 20x3 20,000,000 20,000,000 90% 100% 18,000,000 20,000,000 (9,600,000) (18,000,000) 8,400,000 2,000,000 (7,320,000) (1,920,000) 1,080,000

80,000

Requirement (b): Journal entries ➢ 20x1 Traditional accounting (a) Incurrence of cost: Construction in progress 8.16M Cash (or other accounts) 8.16M

PFRS 15 Contract costs 8.16M Cash (or other accounts) 8.16M

Page |3 (b) Billing: Accounts receivable 10M Progress billings 10M (c) Collection: Cash 9.5M Accounts receivable 9.5M (d) Revenue recognition: Cost of construction 8.16M Construction in progress 1.44M Revenue 9.6M

Receivable 10M Contract liability

10M

Cash Receivable

9.5M 9.5M

Contract liability Revenue

9.6M 9.6M

Cost of construction 8.16M Contract costs 8.16M

➢ 20x2 Traditional accounting Construction in progress 7.32M Cash (or other accounts) 7.32M Accounts receivable 7M Progress billings 7M Cash 6.65M Accounts receivable 6.65M Cost of construction 7.32M Construction in progress 1.08M Revenue 8.4M

PFRS 15 Contract costs 7.32M Cash (or other accounts) 7.32M Receivable 7M Contract liability 7M Cash 6.65M Receivable 6.65M Contract liability 8.4M Revenue 8.4M Cost of construction 7.32M Contract costs

7.32M

➢ 20x3 Traditional accounting Construction in progress 1.92M Cash (or other accounts) 1.92M Accounts receivable 3M Progress billings 3M Cash 3.85M Accounts receivable 3.85M Cost of construction 1.92M Construction in progress 80K Revenue 2M Progress billing 20M Construction in progress 20M to eliminate the accounts

PFRS 15 Contract costs 1.92M Cash (or other accounts) 1.92M Receivable 3M Contract liability 3M Cash 3.85M Receivable 3.85M Contract liability 2M Revenue 2M Cost of construction Contract costs

1.92M 1.92M

Page |4 Requirement (c): Financial statements



The debit balance in the contract liability account on 12/31/x2 is presented as asset.

Page |5

2. Solutions: Requirement (a): Revenue (a) Contract costs incurred per yr. Gross profit for the year

20x1 8,160,000 (8,160,000) -

20x2 20x3 7,320,000 4,520,000 (7,320,000) (1,920,000) 2,600,000

(a)

Revenues in 20x1 and 20x2 are equal to the costs incurred during those years. Revenue in 20x3 is equal to the contract price less the revenues recognized in 20x1 and 20x2 (20M – 8.16M – 7.32M = 4.52M).

Requirement (b): Journal entries ➢ 20x1 Traditional accounting (a) Incurrence of cost: Construction in progress 8.16M Cash (or other accounts) 8.16M (b) Billing: Accounts receivable 10M Progress billings 10M

PFRS 15 Contract costs 8.16M Cash (or other accounts) 8.16M Receivable 10M Contract liability

10M

Page |6 (c) Collection: Cash 9.5M Accounts receivable 9.5M (d) Revenue recognition: Cost of construction 8.16M Revenue 8.16M

Cash Receivable

9.5M 9.5M

Contract liability 8.16M Revenue 8.16M Cost of construction 8.16M Contract costs 8.16M

➢ 20x2 Traditional accounting Construction in progress 7.32M Cash (or other accounts) 7.32M Accounts receivable 7M Progress billings 7M Cash 6.65M Accounts receivable 6.65M Cost of construction 7.32M Revenue 7.32M

PFRS 15 Contract costs 7.32M Cash (or other accounts) Receivable 7M Contract liability Cash 6.65M Receivable Contract liability 7.32M Revenue Cost of construction 7.32M Contract costs

7.32M 7M 6.65M 7.32M 7.32M

➢ 20x3 Traditional accounting Construction in progress 1.92M Cash (or other accounts) 1.92M Accounts receivable 3M Progress billings 3M Cash 3.85M Accounts receivable 3.85M Cost of construction 1.92M Construction in progress 2.6M Revenue 4.52M Progress billing 20M Construction in progress 20M to eliminate the accounts

PFRS 15 Contract costs 1.92M Cash (or other accounts) Receivable 3M Contract liability Cash 3.85M Receivable Contract liability 4.52M Revenue Cost of construction Contract costs

1.92M 3M 3.85M 4.52M

1.92M 1.92M

Page |7 Requirement (c): Financial statements

Page |8

Page |9 PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL 1. B 20M x 2/16 = 2,500,000 2. A Solution: Total contract price Multiply by: % of completion Contract revenue to date Contract revenue in prior years Contract revenue for the year Cost of construction (squeeze) Profit (loss) for the year (a)

20x1 3,000,000 20% 600,000 600,000 (450,000) 150,000

20x2 3,000,000 60% 1,800,000 (600,000) 1,200,000 (990,000) 210,000(a)

(360,000 -150,000) = 210,000

3. C Solution:

(a) (b)

Total contract price Costs incurred to date Estimated costs to complete Estimated total contract costs (given) Expected profit (loss) Multiply by: % of completion (a) ÷ (b) Profit (loss) to date Profit recognized in prior years Profit (loss) for the year

Total contract price Multiply by: % of completion Contract revenue to date Contract revenue in prior years Contract revenue for the year Cost of construction (squeeze) Profit (loss) for the year

20x1 9,000,000 3,900,000

20x2 9,000,000 6,300,000

(not needed)

(not needed)

7,800,000 1,200,000 50% 600,000 600,000

8,100,000 900,000 77.7778% 700,000 (600,000) 100,000

20x1 9,000,000 50% 4,500,000 4,500,000 (3,900,000) 600,000

20x2 9,000,000 77.7778% 7,000,000 (4,500,000) 2,500,000 (2,400,000) 100,000

P a g e | 10

4. C Solution: Contract revenue for the year (a) Cost of construction Profit (loss) for the year

20x1 3,900,000 (3,900,000) -

20x2 2,400,000 (2,400,000) -

Equal to the costs incurred per year. The costs incurred in 20x2 are computed as follows: (6,300,000 - 3,900,000 = 2,400,000). (a)

5. A – No revenue, cost of construction and gross profit are recognized during the course of construction. These are recognized only when the construction is completed and legal title over the constructed building is transferred to the customer.

6. D Solution: 20x1

20x2

20x3

Contract price

18,000,000

18,000,000

18,000,000

Estimated total contract costs

12,000,000

12,300,000

12,280,000

6,000,000

5,700,000

5,720,000

25%

68%

100%

Expected total gross profit Percentage of completion

(a)

Gross profit to date

1,500,000

3,876,000

5,720,000

(1,500,000)

(3,876,000)

1,500,000

2,376,000

1,844,000

3,000,000 12,000,000

8,364,000 12,300,000

12,280,000 12,280,000

25%

68%

100%

Gross profit in prior years Gross profit for the year

(a)

Costs incurred to date Estimated total contract costs Percentage of completion

P a g e | 11 7. B Solution: ➢ Traditional accounting Construction in progress Costs incurred to date - 20x2

4,840,000

Gross profit - 20x1 (see below)

570,000

Gross profit - 20x2 (see below)

990,000

12/31/x2

6,400,000

Contract price Contract costs incurred to date Estimated costs to complete Estimated total contract costs Expected total gross profit Percentage of completion Gross profit to date

20x1

20x2

20x3

8,000,000 1,830,000 4,270,000

8,000,000 4,840,000 1,210,000

8,000,000 6,000,000 -

6,100,000 1,900,000 30%

6,050,000 1,950,000 80%

6,000,000 2,000,000 100%

570,000

1,560,000

2,000,000

(570,000)

(1,560,000)

990,000

440,000

Gross profit in prior years Gross profit for the year

570,000

Construction in progress - 12/31/x2 Progress billings - 12/31/x2 (4M + 3M)

6,400,000 7,000,000

Gross amount due to customer - 12/31/x2

600,000

➢ PFRS 15 Contract liability Revenue - 20x1 (see below) Revenue - 20x2 (see below)

2,400,000 4,000,000

4,000,000

Billings - 20x1

3,000,000

Billings - 20x2

600,000

12/31/x2

P a g e | 12 20x1 Contract price Percentage of completion Revenue to date

20x3

8,000,000

8,000,000

8,000,000

30%

80%

100%

2,400,000

6,400,000

8,000,000

(2,400,000)

(6,400,000)

4,000,000

1,600,000

Revenue in prior years Revenue for the year

20x2

2,400,000

8. A Solution: 20x1

20x2

20x3

Total contract price

5,000,000

5,000,000

5,000,000

Costs incurred to date

1,425,000

4,040,000

5,080,000

Estimated costs to complete

3,325,000

1,010,000

-

Estimated total contract costs

4,750,000

5,050,000

5,080,000

250,000

(50,000)

(80,000)

30%

N/A

100%

75,000

(50,000)

(80,000)

(75,000)

50,000

(125,000)

(30,000)

Expected total profit (loss) Multiply by: % of completion Profit (loss) to date Profit (loss) in prior years Profit (loss) for the year

75,000

Total contract price Percentage of completion

5,000,000

5,000,000

5,000,000

30%

80%

100%

Revenue to date Revenue in prior years

1,500,000

4,000,000 (1,500,000)

5,000,000 (4,000,000)

Revenue for the year

1,500,000

2,500,000

1,000,000

Construction costs Gross profit (loss) for the year

1,425,000 75,000

2,615,000 (115,000)

1,040,000 (40,000)

(10,000)

10,000

(125,000)

(30,000)

(a)

Loss provision/Reversal Net profit (loss) for the year (a)

Costs incurred to date (1) Estimated costs to complete

75,000 1,425,000 3,325,000

4,040,000 1,010,000

5,080,000 -

P a g e | 13 Estimated total contract costs (2) Percentage of completion (1) ÷ (2)

4,750,000

5,050,000

5,080,000

30%

80%

100%

9. C – see previous solution

10. C Solution: Step 1: Place given information in pro-forma computation: (a) Costs incurred to date Estimated costs to complete

20x1 ? ?

(b) Estimated total contract costs

2,250,000

Percentage of completion (a) ÷ (b)

40%

Step 2: ‘Squeeze’ for missing information: (a) Costs incurred to date (2,250,000 x 40%) Estimated costs to complete (b) Estimated total contract costs Percentage of completion (a) ÷ (b)

20x1 900,000 ? 2,250,000 40%

Step 3: ‘Squeeze’ some more: (a) Costs incurred to date Estimated costs to complete (2,250,000 – 900,000)

20x1 900,000 1,350,000

(b) Estimated total contract costs

2,250,000

Percentage of completion (a) ÷ (b)

40%

P a g e | 14 11. A Solution: 20x1 Total contract price 3,000,000 Costs incurred to date (a) Estimated costs to complete, Dec. 31, 20x2 2,250,000 Estimated total contract costs (b) Expected profit (loss) 750,000 Multiply by: % of completion (a) ÷ (b) 40% Profit (loss) to date 300,000 Profit recognized in prior years (given) 300,000 Profit (loss) for the year

20x2 3,000,000 1,800,000 600,000 2,400,000 600,000 75% 450,000 (300,000) 150,000

20x1

20x2

3,000,000 40% 1,200,000 1,200,000 (900,000) 300,000

3,000,000 75% 2,250,000 (1,200,000) 1,050,000 (900,000) 150,000

20x1

20x2

20x3

Costs incurred to date (a)

10,500,000

24,800,000

30,800,000

Estimated costs to complete

19,500,000

6,200,000

-

Estimated total contract costs

30,000,000

31,000,000

30,800,000

115%

120%

120%

34,500,000

37,200,000

36,960,000

35%

80%

100%

29,760,000

36,960,000

Total contract price Multiply by: % of completion Contract revenue to date Contract revenue in prior years Contract revenue for the year Cost of construction (squeeze) Profit (loss) for the year

12. C Solution:

Multiply by: Cost + Var. fee

(b)

Estimated total contract price Multiply by: % of completion Revenue to date Less: Revenue in prior yrs. Revenue for the year

(c)

12,075,000 12,075,000

(12,075,000) (29,760,000) 17,685,000

7,200,000

P a g e | 15 Cost of construction Gross profit for the year (a)

(10,500,000)

(14,300,000)

(6,000,000)

1,575,000

3,385,000

1,200,000

20x1: 10,500,000 20x2: (10,500,000 + 14,300,000) = 24,800,000 20x3: (10,500,000 + 14,300,000 + 6,000,000) = 30,800,000

(b)

The 5% additional fee is included in 20x2 when it became highly probable that it will be received. (c)

% of completion = Costs incurred to date ÷ Estimated total contract costs

13. C Solution: 20x1 Total contract price Estimated total contract costs Expected gross profit on completion

4,000,000 (3,000,000)

4,000,000 (3,000,000)

1,000,000

1,000,000

Multiply by: % of completion Gross profit to date

20x2

35%

90%

350,000

900,000

Gross profit in prior years Gross profit for the year

Total contract price Percentage of completion Revenue to date

(350,000) 350,000 20x1

20x2

4,000,000

4,000,000

35%

90%

1,400,000

3,600,000

Revenue in prior years Revenue for the year Construction costs (squeeze) Gross profit for the year

550,000

(1,400,000) 1,400,000

2,200,000

(1,050,000)

(1,650,000)

350,000

550,000

P a g e | 16 14. A Solution: 20x1

20x2

Costs incurred to date

1,536,000

11,528,000

Divide by: Estimated total contract costs

12,800,000

13,100,000 (a)

12%

88%

Percentage of completion

(12.8M initial estimate + 300,000 additional costs from modification) = 13,100,000 (a)

20x1 Total contract price

20x2

15,000,000

15,750,000 (b)

(12,800,000)

(13,100,000)

2,200,000

2,650,000

12%

88%

Profit (loss) to date Profit (loss) in prior years

264,000

2,332,000 (264,000)

Profit (loss) for the year

264,000

2,068,000

Estimated total contract costs Expected total profit Multiply by: % of completion

(b)

(15M original contract price x 105%) = 15,750,000 20x1

Total contract price Percentage of completion Revenue to date

20x2

15,000,000

15,750,000

12%

88%

1,800,000

Revenue in prior years

13,860,000 (1,800,000)

Revenue for the year

1,800,000

12,060,000

Construction costs

1,536,000

9,992,000

264,000

2,068,000

Profit (loss) for the year

P a g e | 17 15. C Solution: Construction in progress, ending balances Contract costs incurred to date (a) Profit to date Profit in previous years Profit for the year (a)

20x1 122,000 (105,000) 17,000 17,000

20x2 364,000 (297,000) 67,000 (17,000) 50,000

Contract costs incurred to date in 20x2 = (105,000 + 192,000) = 297,000.

20x1 122,000 (105,000) 17,000

Revenue for the year (squeeze) Cost of construction (b) Profit for the year

20x2 242,000 (192,000) 50,000

Under the ‘cost-to-cost’ method of measuring progress, the “cost of construction” for a year is equal to the contract costs incurred during that year.

(b)

Optional reconciliation: ➢ CIP as of 12/31/x2 of 364,000 less CIP as of 12/31/x1 of 122,000 = 242,000 revenue in 20x2 Accounts receivable 12/31/x1 Billing in 20x2 (420K - 100K)

100,000 320,000

120,000

Collection (squeeze)

300,000

12/31/x2

P a g e | 18 PROBLEM 5: CLASSROOM ACTIVITY ACTIVITY 1: Solutions: Step 1: Identify the contract with the customer Requirement (a): YES, t...